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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number 0-4887

 

 

UMB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Missouri   43-0903811

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. – Employer

Identification Number)

1010 Grand Boulevard, Kansas City, Missouri   64106
(Address of principal executive offices)   (ZIP Code)

(Registrant’s telephone number, including area code): (816) 860-7000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x   Accelerated filer                    ¨
Non- accelerated filer   ¨  (Do not check if a smaller  reporting company)   Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of October 31, 2010, UMB Financial Corporation had 40,406,684 shares of common stock outstanding.

 

 

 


Table of Contents

 

UMB FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

PART I – FINANCIAL INFORMATION

     3   
ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED)      3   

CONDENSED CONSOLIDATED BALANCE SHEETS

     3   

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

     4   

STATEMENTS OF CHANGES IN CONDENSED CONSOLIDATED SHAREHOLDERS' EQUITY

     5   

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

     6   

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     7   
ITEM 2.  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     21   
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      36   
ITEM 4.   CONTROLS AND PROCEDURES      40   

PART II – OTHER INFORMATION

     41   
ITEM 1.   LEGAL PROCEEDINGS      41   
ITEM 1A.   RISK FACTORS      41   
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      41   
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES      42   
ITEM 4.   RESERVED      42   
ITEM 5.   OTHER INFORMATION      42   
ITEM 6.   EXHIBITS      42   

SIGNATURES

     43   

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

     45   

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

     46   

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     47   

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     48   

 

2


Table of Contents

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, dollars in thousands, except share and per share data)

 

      September 30,
2010
    December 31,
2009
 

ASSETS

    

Loans:

   $ 4,583,562      $ 4,314,705   

Allowance for loan losses

     (72,719     (64,139
                

Net loans

     4,510,843        4,250,566   
                

Loans held for sale

     11,256        17,523   

Investment securities:

  

Available for sale

     5,058,667        4,885,788   

Held to maturity (market value of $67,177 and $58,366, respectively)

     59,910        56,986   

Trading

     40,520        38,214   

Federal Reserve Bank stock and other

     22,344        22,732   
                

Total investment securities

     5,181,441        5,003,720   
                

Federal funds sold and securities purchased under agreements to resell

     22,399        329,765   

Interest-bearing due from banks

     658,347        1,057,195   

Cash and due from banks

     332,699        458,093   

Bank premises and equipment, net

     215,627        217,642   

Accrued income

     63,990        64,949   

Goodwill

     163,584        131,356   

Other intangibles

     69,723        47,462   

Other assets

     110,132        85,084   
                

Total assets

   $ 11,340,041      $ 11,663,355   
                

LIABILITIES

  

Deposits:

  

Noninterest-bearing demand

   $ 2,778,728      $ 2,775,222   

Interest-bearing demand and savings

     4,278,388        3,904,268   

Time deposits under $100,000

     710,991        772,040   

Time deposits of $100,000 or more

     833,708        1,082,958   
                

Total deposits

     8,601,815        8,534,488   

Federal funds purchased and repurchase agreements

     1,432,179        1,927,607   

Short-term debt

     27,847        29,514   

Long-term debt

     9,040        25,458   

Accrued expenses and taxes

     148,927        107,896   

Other liabilities

     30,053        22,841   
                

Total liabilities

     10,249,861        10,647,804   
                

SHAREHOLDERS’ EQUITY

  

Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 40,410,612 and 40,439,607 shares outstanding, respectively

     55,057        55,057   

Capital surplus

     716,278        712,774   

Retained earnings

     612,265        562,748   

Accumulated other comprehensive income

     67,399        40,454   

Treasury stock, 14,646,118 and 14,617,123 shares, at cost, respectively

     (360,819     (355,482
                

Total shareholders’ equity

     1,090,180        1,015,551   
                

Total liabilities and shareholders’ equity

   $ 11,340,041      $ 11,663,355   
                

See Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

 

UMB FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, dollars in thousands, except share and per share data)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

INTEREST INCOME

           

Loans

   $ 56,581       $ 54,478       $ 166,013       $ 160,813   

Securities:

           

Taxable interest

     22,026         25,455         68,301         80,395   

Tax-exempt interest

     7,330         7,554         21,675         21,742   
                                   

Total securities income

     29,356         33,009         89,976         102,137   

Federal funds and resell agreements

     29         48         137         229   

Interest-bearing due from banks

     749         1,181         3,099         2,965   

Trading securities

     176         210         500         570   
                                   

Total interest income

     86,891         88,926         259,725         266,714   
                                   

INTEREST EXPENSE

           

Deposits

     7,900         12,223         25,985         38,656   

Federal funds and repurchase agreements

     525         446         1,473         1,643   

Long-term debt

     83         361         441         1,138   
                                   

Total interest expense

     8,508         13,030         27,899         41,437   
                                   

Net interest income

     78,383         75,896         231,826         225,277   

Provision for loan losses

     7,700         8,300         24,110         20,600   
                                   

Net interest income after provision for loan losses

     70,683         67,596         207,716         204,677   
                                   

NONINTEREST INCOME

           

Trust and securities processing

     39,843         32,630         114,029         86,164   

Trading and investment banking

     7,897         6,787         20,454         20,625   

Service charges on deposits

     19,431         20,598         60,114         62,527   

Insurance fees and commissions

     1,554         1,255         4,540         3,710   

Brokerage fees

     1,746         1,629         4,679         5,493   

Bankcard fees

     14,555         11,671         40,554         33,760   

Gains on sale of securities available for sale, net

     752         3,306         7,270         5,198   

Other

     4,306         2,642         13,950         9,273   
                                   

Total noninterest income

     90,084         80,518         265,590         226,750   
                                   

NONINTEREST EXPENSE

           

Salaries and employee benefits

     69,044         60,193         194,849         177,786   

Occupancy, net

     9,162         8,982         27,007         25,698   

Equipment

     11,122         11,187         33,205         36,181   

Supplies and services

     4,822         4,787         14,209         15,734   

Marketing and business development

     4,426         4,036         12,561         11,397   

Processing fees

     11,570         9,659         33,812         24,803   

Legal and consulting

     4,108         2,763         8,500         6,954   

Bankcard

     4,292         3,615         11,842         10,498   

Amortization of other intangibles

     3,150         1,847         7,684         4,318   

Regulatory fees

     3,219         3,036         9,974         12,672   

Other

     5,720         5,152         20,470         14,738   
                                   

Total noninterest expense

     130,635         115,257         374,113         340,779   
                                   

Income before income taxes

     30,132         32,857         99,193         90,648   

Income tax provision

     7,359         8,859         27,223         25,022   
                                   

NET INCOME

   $ 22,773       $ 23,998       $ 71,970       $ 65,626   
                                   

PER SHARE DATA

           

Net income – basic

   $ 0.57       $ 0.60       $ 1.80       $ 1.62   

Net income – diluted

     0.57         0.59         1.78         1.61   

Dividends

     0.185         0.175         0.555         0.525   

Weighted average shares outstanding

     40,081,108         40,240,293         40,083,419         40,402,992   

See Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

 

UMB FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited, dollars in thousands, except per share data)

 

     Common
Stock
     Capital
Surplus
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
     Treasury
Stock
    Total  

Balance – January 1, 2009

   $ 55,057       $ 707,812      $ 502,073      $ 41,105       $ (331,236   $ 974,811   

Comprehensive income

              

Net income

     —           —          65,626        —           —          65,626   

Change in unrealized gains on securities, net of tax

     —           —          —          15,219         —          15,219   
                    

Total comprehensive income

                 80,845   

Cash dividends ($0.525 per share)

     —           —          (21,329     —           —          (21,329

Purchase of treasury stock

     —           —          —          —           (26,331     (26,331

Issuance of equity awards

     —           (1,263     —          —           1,395        132   

Recognition of equity based compensation

     —           3,948        —          —           —          3,948   

Net tax benefit related to equity compensation plans

     —           187        —          —           —          187   

Sale of treasury stock

     —           314        —          —           159        473   

Exercise of stock options

     —           375        —          —           517        892   
                                                  

Balance – September 30, 2009

   $ 55,057       $ 711,373      $ 546,370      $ 56,324       $ (355,496   $ 1,013,628   
                                                  

Balance – January 1, 2010

   $ 55,057       $ 712,774      $ 562,748      $ 40,454       $ (355,482   $ 1,015,551   

Comprehensive income

              

Net income

     —           —          71,970        —           —          71,970   

Change in unrealized gains on securities, net of tax

     —           —          —          26,945         —          26,945   
                    

Total comprehensive income

                 98,915   

Cash dividends ($0.555 per share)

     —           —          (22,453     —           —          (22,453

Purchase of treasury stock

     —           —          —          —           (7,554     (7,554

Issuance of equity awards

     —           (1,617     —          —           1,742        125   

Recognition of equity based compensation

     —           4,398        —          —           —          4,398   

Net tax benefit related to equity compensation plans

     —           155        —          —           —          155   

Sale of treasury stock

     —           333        —          —           188        521   

Exercise of stock options

     —           235        —          —           287        522   
                                                  

Balance – September 30, 2010

   $ 55,057       $ 716,278      $ 612,265      $ 67,399       $ (360,819     1,090,180   
                                                  

See Notes to Condensed Consolidated Financial Statements.


Table of Contents

 

UMB FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

 

     Nine Months Ended
September 30,
 
      2010     2009  

Operating Activities

    

Net Income

   $ 71,970      $ 65,626   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     24,110        20,600   

Depreciation and amortization

     28,846        27,943   

Deferred income tax benefit

     (9,349     (7,088

Net increase in trading securities

     (2,306     (8,007

Gains on sales of securities available for sale

     (7,270     (5,198

Gains on sales of assets

     (105     (18

Amortization of securities premiums, net of discount accretion

     22,739        18,269   

Originations of loans held for sale

     (131,607     (202,768

Net gains on sales of loans held for sale

     (648     (1,269

Proceeds from sales of loans held for sale

     138,522        206,513   

Issuance of equity awards

     125        132   

Equity based compensation

     4,398        3,948   

Changes in:

    

Accrued income

     959        (291

Accrued expenses and taxes

     (3,113     8,701   

Other assets and liabilities, net

     1,630        18   
                

Net cash provided by operating activities

     138,901        127,111   
                

Investing Activities

    

Proceeds from maturities of securities held to maturity

     8,264        4,923   

Proceeds from sales of securities available for sale

     515,256        89,517   

Proceeds from maturities of securities available for sale

     1,650,870        2,603,346   

Purchases of securities held to maturity

     (10,949     (5,505

Purchases of securities available for sale

     (2,318,615     (2,278,875

Net (increase) decrease in loans

     (206,467     56,978   

Net decrease in fed funds sold and resell agreements

     307,366        131,138   

Net decrease (increase) in interest-bearing balances due from other financial institutions

     95,022        (189,238

Purchases of bank premises and equipment

     (19,755     (13,758

Net cash paid for acquisitions

     (114,405     (26,290

Proceeds from sales of bank premises and equipment

     430        1,437   
                

Net cash (used in) provided by investing activities

     (92,983     373,673   
                

Financing Activities

    

Net increase (decrease) in demand and savings deposits

     377,476        (11,420

Net (decrease) increase in time deposits

     (310,299     176,196   

Net decrease in fed funds purchased and repurchase agreements

     (495,428     (980,677

Net (decrease) increase in short-term debt

     (2,868     4,529   

Proceeds from long-term debt

     —          2,000   

Repayment of long-term debt

     (15,217     (5,567

Cash dividends paid

     (22,446     (21,322

Net tax benefit related to equity compensation plans

     155        187   

Proceeds from exercise of stock options and sales of treasury shares

     1,043        1,365   

Purchases of treasury stock

     (7,554     (26,331
                

Net cash used in financing activities

     (475,138     (861,040
                

Decrease in cash and due from banks

     (429,220     (360,256

Cash and due from banks at beginning of period

     1,229,645        887,559   
                

Cash and due from banks at end of period

   $ 800,425      $ 527,303   
                

Supplemental Disclosures:

    

Income taxes paid

   $ 37,547      $ 25,627   

Total interest paid

     31,595        41,158   

See Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

 

UMB FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

1. Financial Statement Presentation

The condensed consolidated financial statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the “Company”) after elimination of all significant intercompany transactions. In the opinion of management of the Company, all adjustments, which were of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations, have been made. The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year. The financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

In the previously filed Form 10-Q for the period ended September 30, 2009, the Company transposed proceeds from maturities and proceeds from sales of available for sale securities in the investing activities section of the condensed consolidated statement of cash flows. As a result, the accompanying 2009 condensed consolidated statement of cash flows has been corrected to list the appropriate title with the appropriate numeric total. There is no quantitative change in cash flows of the Company as a result of this adjustment.

2. Summary of Accounting Policies

The Company is a multi-bank financial holding company, which offers a wide range of banking and other financial services to its customers through its branches and offices in the states of Missouri, Kansas, Colorado, Illinois, Oklahoma, Arizona, Nebraska, Pennsylvania, South Dakota, Indiana, Wisconsin, Utah, New Jersey, and Massachusetts. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies to assist the reader in understanding the financial presentation is listed in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Interest-bearing Due From Banks

Amounts due from the Federal Reserve Bank which are interest-bearing for all periods presented, and amounts due from certificates of deposits held at other financial institutions are included in interest-bearing due from banks. The amount due from the Federal Reserve Bank totaled $467.7 million and $238.9 million at September 30, 2010 and September 30, 2009, respectively, and is considered cash and cash equivalents. The amounts due from certificates of deposit totaled $191.6 million and $300.5 million at September 30, 2010 and September 30, 2009, respectively.

This table provides a summary of cash and due from banks as presented on the Condensed Consolidated Statements of Cash Flows as of September 30, 2010 and September 30, 2009 (in thousands):

 

     September 30,  
     2010      2009  

Due from the Federal Reserve

   $ 467,726       $ 238,881   

Cash and due from banks

     332,699         288,422   
                 

Cash and due from banks at end of period

   $ 800,425       $ 527,303   
                 

 

7


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

Per Share Data

Basic income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted quarterly per share data includes the dilutive effect of 218,495 and 323,413 shares issuable upon the exercise of options granted by the Company and outstanding at September 30, 2010 and 2009, respectively. Diluted year-to-date income per share includes the dilutive effect of 250,966 and 319,453 shares issuable upon the exercise of stock options granted by the Company and outstanding at September 30, 2010 and 2009, respectively.

Options issued under employee benefit plans to purchase 1,107,949 shares of common stock were outstanding at September 30, 2010, but were not included in the computation of quarterly and year-to-date diluted EPS because the options were anti-dilutive. Options issued under employee benefit plans to purchase 784,904 shares of common stock were outstanding at September 30, 2009, but were not included in the computation of quarterly and year-to-date diluted EPS because the options were anti-dilutive.

3. New Accounting Pronouncements

Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140 In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 166 “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140” or Accounting Standards Codification (“ASC”) 860. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This Statement removes the concept of a qualifying special-purpose entity from SFAS No. 140 and removes the exception from applying FASB Interpretation No. 46 to qualifying special-purpose entities. The Company adopted this statement on January 1, 2010 with no impact on its financial position or results of operations.

Amendments to FASB Interpretation No. 46(R) In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” or ASC 810, which amends the consolidation guidance applicable to variable interest entities. The amendments to the consolidation guidance affect all entities currently within the scope of FIN 46(R), as well as qualifying special-purpose entities that are currently excluded from the scope of FIN 46(R). The Company adopted this statement on January 1, 2010 with no impact on its financial position or results of operations.

Fair Value Measurements and Disclosures In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures” (ASU 2010-06), which amends ASC 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The Company adopted this statement on January 1, 2010 with no impact on its financial position or results of operations except for additional financial statement disclosures.

Credit Quality of Financing Receivables and the Allowance for Credit Losses In July 2010, the FASB issued ASU No. 2010-20, “Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (ASU 2010-10), which amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financial receivables and its allowance for credit losses. ASU 2010-20 will be effective for the Company for the annual reporting period ending December 31, 2010. The Company is currently evaluating the effect that this standard will have on its financial statement disclosures.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

4. Loans and Allowance for Loan Losses

This table provides a summary of the major categories of loans as of September 30, 2010 and December 31, 2009 (in thousands):

 

     September 30,
2010
     December 31,
2009
 

Commercial, financial, and agricultural

   $ 2,038,631       $ 1,963,533   

Real estate construction

     94,821         106,914   

Consumer

     442,405         441,406   

Real estate

     2,000,199         1,795,342   

Leases

     7,506         7,510   
                 

Total loans

     4,583,562         4,314,705   

Loans held for sale

     11,256         17,523   
                 

Total loans and loans held for sale

   $ 4,594,818       $ 4,332,228   
                 

This table provides an analysis of the allowance for loan losses for the three and nine months ended September 30, 2010 and 2009 (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Beginning allowance – July 1 and January 1

   $ 70,110      $ 55,109      $ 64,139      $ 52,297   

Additions (deductions):

        

Charge-offs

     (6,060     (5,663     (18,424     (17,905

Recoveries

     969        1,066        2,894        3,820   
                                

Net charge-offs

     (5,091     (4,597     (15,530     (14,085
                                

Provision charged to expense

     7,700        8,300        24,110        20,600   
                                

Ending allowance – September 30

   $ 72,719      $ 58,812      $ 72,719      $ 58,812   
                                

Impaired loans Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral securing the loan if considered collateral dependant. The summary below provides an analysis of impaired loans as of and for the nine months ended September 30, 2010 and twelve months ended December 31, 2009 (in thousands):

 

     September 30,
2010
     December 31,
2009
 

Total impaired loans as of September 30 and December 31

   $ 23,666       $ 20,880   

Amount of impaired loans which have a related allowance

     6,094         14,290   

Amount of related allowance

     2,852         3,813   

Remaining impaired loans with no allowance

     17,572         6,590   

Average recorded investment in impaired loans during the period

     22,519         14,974   

There was an insignificant amount of interest recognized on impaired loans during 2010 and 2009.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

5. Securities

Securities Available for Sale

This table provides detailed information about securities available for sale at September 30, 2010 and December 31, 2009 (in thousands):

 

September 30, 2010

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. Treasury

   $ 664,762       $ 5,998       $ —        $ 670,760   

U.S. Agencies

     1,567,716         17,174         (9     1,584,881   

Mortgage-backed

     1,607,441         52,883         (75     1,660,249   

State and political subdivisions

     1,109,266         30,979         (635     1,139,610   

Corporates

     3,170         1         (4     3,167   
                                  

Total

   $ 4,952,355       $ 107,035       $ (723   $ 5,058,667   
                                  

December 31, 2009

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. Treasury

   $ 596,067       $ 3,549       $ (539   $ 599,077   

U.S. Agencies

     1,479,784         10,426         (1,450     1,488,760   

Mortgage-backed

     1,786,899         33,038         (6,279     1,813,658   

State and political subdivisions

     958,231         26,530         (468     984,293   
                                  

Total

   $ 4,820,981       $ 73,543       $ (8,736   $ 4,885,788   
                                  

The following table presents contractual maturity information for securities available for sale at September 30, 2010 (in thousands):

 

     Amortized
Cost
     Fair
Value
 

Due in 1 year or less

   $ 693,743       $ 698,034   

Due after 1 year through 5 years

     2,347,519         2,387,206   

Due after 5 years through 10 years

     278,099         287,617   

Due after 10 years

     25,553         25,561   
                 

Total

     3,344,914         3,398,418   

Mortgage-backed securities

     1,607,441         1,660,249   
                 

Total securities available for sale

   $ 4,952,355       $ 5,058,667   
                 

Securities may be disposed of before contractual maturities due to sales by the Company or because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For the nine months ended September 30, 2010, proceeds from the sales of securities available for sale were $515,256,000 compared to $89,517,000 for the same period in 2009. Securities transactions resulted in gross realized gains of $7,499,000 and $5,198,000 for the nine months ended September 30, 2010 and 2009. The gross realized losses for the nine months ended September 30, 2010 and 2009 were $229,000 and $0, respectively.

Trading Securities

The net unrealized gains on trading securities at September 30, 2010 and September 30, 2009 were $110,000 and $293,000 respectively, and were included in trading and investment banking income.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

Securities Held to Maturity

The table below provides detailed information for securities held to maturity at September 30, 2010 and December 31, 2009 (in thousands):

 

September 30, 2010

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

State and political subdivisions

   $ 59,910       $ 7,267       $ —         $ 67,177   
                                   

December 31, 2009

                           
                                   

State and political subdivisions

   $ 56,986       $ 1,380       $ —         $ 58,366   
                                   

The following table presents contractual maturity information for securities held to maturity at September 30, 2010 (in thousands):

 

     Amortized
Cost
     Fair
Value
 

Due in 1 year or less

   $ 1,635       $ 1,833   

Due after 1 year through 5 years

     14,268         15,999   

Due after 5 years through 10 years

     7,828         8,778   

Due after 10 years

     36,179         40,567   
                 

Total securities held to maturity

   $ 59,910       $ 67,177   
                 

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

There were no sales of securities held to maturity during the first nine months of 2010 and 2009.

Securities available for sale with a market value of $3,557,004,106 at September 30, 2010, and $4,227,243,117 at December 31, 2009, were pledged to secure U.S. Government deposits, other public deposits and certain trust deposits as required by law.

The following table shows the Company’s available for sale investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009 (in thousands):

 

September 30, 2010

   Less than 12 months     12 months or more      Total  

Description of Securities

   Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Direct obligations of U.S. government agencies

   $ 7,263       $ (9   $ —         $ —         $ 7,263       $ (9

Federal agency mortgage backed securities

     42,757         (75     —           —           42,757         (75

Municipal securities

     73,769         (635     —           —           73,769         (635

Corporates

     2,282         (4     —           —           2,282         (4
                                                    

Total temporarily-impaired debt securities available for sale

   $ 126,071       $ (723   $ —         $ —         $ 126,071       $ (723
                                                    

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

December 31, 2009

   Less than 12 months     12 months or more     Total  

Description of Securities

   Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

U.S. Treasury obligations

   $ 169,516       $ (539   $ —         $ —        $ 169,516       $ (539

Direct obligations of U.S. government agencies

     373,255         (1,450     —           —          373,255         (1,450

Federal agency mortgage backed securities

     398,111         (6,279     —           —          398,111         (6,279

Municipal securities

     44,921         (427     1,711         (41     46,632         (468
                                                   

Total temporarily-impaired debt securities
available for sale

   $ 985,803       $ (8,695   $ 1,711       $ (41   $ 987,514       $ (8,736
                                                   

The unrealized losses in the Company’s investments in direct obligations of U.S. government agencies, federal agency mortgage backed securities, and municipal securities were caused by interest rate risk. Because the Company does not have the intent to sell these securities and it is more likely than not that the Company will not be required to sell these securities before a recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2010.

6. Goodwill and Other Intangibles

Changes in the carrying amount of goodwill for the periods ended September 30, 2010 and December 31, 2009 by operating segment are as follows (in thousands):

 

     Commercial
Financial
Services
    Institutional
Financial
Services
     Personal
Financial
Services
    Total  

Balances as of January 1, 2009

   $ 42,999      $ 25,988       $ 35,937      $ 104,924   

Acquisition of J.D. Clark & Co., Inc.

     —          19,476         —          19,476   

Other goodwill acquired during period

       5,875         1,355        7,230   

Other

     (154     —           (120     (274
                                 

Balances as of December 31, 2009

   $ 42,845      $ 51,339       $ 37,172      $ 131,356   
                                 

Balances as of January 1, 2010

   $ 42,845      $ 51,339       $ 37,172      $ 131,356   

Acquisition of Prairie Capital Management, LLC

     —          —           32,228        32,228   
                                 

Balances as of September 30, 2010

   $ 42,845      $ 51,339       $ 69,400      $ 163,584   
                                 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

     As of September 30, 2010  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Core deposit intangibles assets

   $ 36,497       $ 26,204       $ 10,293   

Other intangible assets

     44,681         13,861         30,820   

Other intangible assets acquired from the acquisition of Prairie Capital Management, LLC

     19,418         407         19,011   

Other intangible assets acquired during period

     10,526         927         9,599   
                          

Total other intangible assets

     74,625         15,195         59,430   
                          

Total intangible assets

   $ 111,122       $ 41,399       $ 69,723   
                          

 

     As of December 31, 2009  

Core deposit intangible assets

   $ 36,497       $ 24,444       $ 12,053   

Other intangible assets

     9,151         6,812         2,315   

Other intangible assets acquired from the acquisition of J.D. Clark & Co., Inc.

     24,831         2,278         22,553   

Other intangible assets acquired during period

     10,699         182         10,541   
                          

Total other intangible assets

     44,681         9,272         35,409   
                          

Total intangible assets

   $ 81,178       $ 33,716       $ 47,462   
                          

Following is the aggregate amortization expense recognized in each period (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Aggregate amortization expense

   $ 3,150       $ 1,847       $ 7,684       $ 4,318   
                                   

Estimated amortization expense of intangible assets on future years (in thousands):

 

For the three months ended December 31, 2010

   $ 3,020   

For the year ended December 31, 2011

     11,342   

For the year ended December 31, 2012

     9,987   

For the year ended December 31, 2013

     8,856   

For the year ended December 31, 2014

     8,100   

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

7. Other Comprehensive Income

The Company’s only component of other comprehensive income for the three and nine months ended September 30, 2010 and 2009 was the net unrealized gains and losses on available for sale securities (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Change in unrealized holding gains, net

   $ 11,856      $ 22,310      $ 49,770      $ 29,222   

Less: Reclassification adjustments for gains included in income

     (752     (3,306     (7,270     (5,198
                                

Net unrealized holding gains

     11,104        19,004        42,500        24,024   

Income tax expense

     (4,082     (6,918     (15,555     (8,805
                                

Other comprehensive income

   $ 7,022      $ 12,086      $ 26,945      $ 15,219   
                                

8. Commitments, Contingencies and Guarantees

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit, futures contracts, forward foreign exchange contracts and spot foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. The contract or notional amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments. Many of the commitments expire without being drawn upon; therefore, the total amount of these commitments does not necessarily represent the future cash requirements of the Company.

The following table summarizes the Company’s off-balance-sheet financial instruments.

Contract or Notional Amount (in thousands):

 

     September 30,
2010
     December 31,
2009
 

Commitments to extend credit for loans (excluding credit card loans)

   $ 1,740,185       $ 1,868,869   

Commitments to extend credit under credit card loans

     1,454,829         1,320,416   

Commercial letters of credit

     2,386         3,538   

Standby letters of credit

     281,556         308,866   

Futures contracts

     19,000         13,300   

Forward foreign exchange contracts

     24,317         69,342   

Spot foreign exchange contracts

     6,040         5,513   

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit, commercial letters of credit, and standby letters of credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

In the normal course of business, the Company and its subsidiaries are named defendants in various lawsuits and counter-claims. In the opinion of management, after consultation with legal counsel, none of these lawsuits are expected to have a materially adverse effect on the financial position, results of operations or cash flows of the Company.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

9. Business Segment Reporting

The Company has strategically aligned its operations into the following three reportable segments (collectively, “Business Segments”): Commercial Financial Services, Institutional Financial Services, and Personal Financial Services. The Business Segments were redefined during the first quarter of 2010 to better organize the Company’s business around customer needs. In 2009, the Business Segments were Commercial Banking and Lending, Payment and Technology Solutions, Banking Services, Consumer Services, Asset Management, and Fund Services. Business segment financial results produced by the Company’s internal management accounting system are evaluated regularly by the Executive Committee in deciding how to allocate resources and assess performance for individual Business Segments. The management accounting system assigns balance sheet and income statement items to each business segment using methodologies that are refined on an ongoing basis. For comparability purposes, amounts in all periods are based on methodologies in effect at September 30, 2010.

The following summaries provide information about the activities of each segment:

Commercial Financial Services resulted in combining Commercial Banking and Lending with Treasury Management (previously a component of Payment and Technology Solutions). Commercial Financial Services serves the commercial lending and leasing, capital markets, and treasury management needs of the Company’s mid-market businesses and governmental entities by offering various products and services. Such services include commercial loans, letters of credit, loan syndication services, consultative services, and a variety of financial options for companies that need non-traditional banking services. Capital markets services include asset-based financing, asset securitization, equity and mezzanine financing, factoring, private and public placement of senior debt, as well as merger and acquisition consulting. Treasury management services include depository services, account reconciliation services, electronic fund transfer services, controlled disbursements, lockbox services, and remote deposit capture services.

Institutional Financial Services is a combination of Banking Services, Fund Services, and Asset Management services provided to institutional clients. This segment also includes consumer credit card services, formerly included in Consumer Services, and commercial credit card services, formerly included in Payment and Technology Solutions. Healthcare services, mutual fund cash management and international payments, previously included in Payment and Technology Solutions, are also included in this segment. Institutional Financial Services includes businesses such as the Company’s institutional investment services functions, Scout Investment Advisors, UMB Fund Services, corporate trust and escrow services as well as correspondent banking, investment banking, and UMB Healthcare Services. Products and services include bond trading transactions, cash letter collections, FiServ account processing, investment portfolio accounting and safekeeping, reporting for asset/liability management, and Fed funds transactions. UMB Fund Services provides fund administration and accounting, investor services and transfer agency, marketing and distribution, custody and alternative investment services.

Personal Financial Services combines Consumer Services and Asset Management services provided to personal clients. This segment combines the Company’s consumer bank with the individual investment and wealth management solutions. The range of services offered to UMB clients extends from a basic checking account to estate planning and trust services. Products and services include the Company’s bank branches, call center, internet banking and ATM network, deposit accounts, private banking, installment loans, home equity lines of credit, residential mortgages, small business loans, brokerage services, and insurance services in addition to a full spectrum of investment advisory, trust, and custody services.

Treasury and Other Adjustments includes asset and liability management activities and miscellaneous other items of a corporate nature not allocated to specific business lines. The assets within this segment include the Company’s investment portfolio. Corporate eliminations are also allocated to this segment.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

Business Segment Information

Segment financial results were as follows (in thousands):

 

     Three Months Ended September 30,  
     Commercial Financial
Services
     Institutional Financial
Services
 
     2010      2009      2010      2009  

Net interest income

   $ 38,859       $ 39,428       $ 13,414       $ 13,433   

Provision for loan losses

     2,727         4,972         4,505         2,946   

Noninterest income

     8,740         8,166         55,617         45,479   

Noninterest expense

     28,960         26,867         52,892         43,299   
                                   

Income before income taxes

   $ 15,912       $ 15,755       $ 11,634       $ 12,667   
                                   

Average assets

   $ 3,660,000       $ 3,507,000       $ 721,000       $ 540,000   

Depreciation and amortization

     2,166         2,238         3,856         3,126   

Expenditures for additions to premises and equipment

     1,730         1,456         3,455         2,157   
     Personal Financial
Services
     Treasury and Other
Adjustments
 
     2010      2009      2010      2009  

Net interest income

   $ 26,110       $ 23,002       $ —         $ 33   

Provision for loan losses

     468         382         —           —     

Noninterest income

     24,857         23,597         870         3,276   

Noninterest expense

     48,439         46,062         344         (971
                                   

Income before income taxes

   $ 2,060       $ 155       $ 526       $ 4,280   
                                   

Average assets

   $ 765,000       $ 812,000       $ 5,856,000       $ 4,988,000   

Depreciation and amortization

     3,447         3,376         698         565   

Expenditures for additions to premises and equipment

     3,085         1,395         990         462   
     Total Consolidated Company         
     2010      2009     

Net interest income

   $ 78,383       $ 75,896      

Provision for loan losses

     7,700         8,300      

Noninterest income

     90,084         80,518      

Noninterest expense

     130,635         115,257      
                    

Income before income taxes

   $ 30,132       $ 32,857      
                    

Average assets

   $ 11,002,000       $ 9,847,000      

Depreciation and amortization

     10,167         9,305      

Expenditures for additions to premises and equipment

     9,260         5,470      

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

     Nine Months Ended September 30,  
     Commercial Financial
Services
    Institutional Financial
Services
 
     2010      2009     2010     2009  

Net interest income

   $ 115,262       $ 114,399      $ 38,324      $ 42,589   

Provision for loan losses

     8,351         10,275        14,220        9,451   

Noninterest income

     25,893         24,538        161,863        128,699   

Noninterest expense

     87,188         82,292        147,855        120,134   
                                 

Income before income taxes

   $ 45,616       $ 46,370      $ 38,112      $ 41,703   
                                 

Average assets

   $ 3,554,000       $ 3,515,000      $ 701,000      $ 511,000   

Depreciation and amortization

     6,708         7,204        11,154        8,262   

Expenditures for additions to premises and equipment

     3,744         4,505        8,433        6,933   
     Personal Financial
Services
    Treasury and Other
Adjustments
 
     2010      2009     2010     2009  

Net interest income

   $ 78,245       $ 68,286      $ (5   $ 3   

Provision for loan losses

     1,539         874        —          —     

Noninterest income

     71,437         69,585        6,397        3,928   

Noninterest expense

     135,084         137,777        3,986        576   
                                 

Income before income taxes

   $ 13,059       $ (780   $ 2,406      $ 3,355   
                                 

Average assets

   $ 767,000       $ 849,000      $ 5,934,000      $ 5,156,000   

Depreciation and amortization

     9,390         11,106        1,594        1,371   

Expenditures for additions to premises and equipment

     6,136         3,564        1,442        743   
     Total Consolidated Company        
     2010      2009    

Net interest income

   $ 231,826       $ 225,277     

Provision for loan losses

     24,110         20,600     

Noninterest income

     265,590         226,750     

Noninterest expense

     374,113         340,779     
                   

Income before income taxes

   $ 99,193       $ 90,648     
                   

Average assets

   $ 10,956,000       $ 10,031,000     

Depreciation and amortization

     28,846         27,943     

Expenditures for additions to premises and equipment

     19,755         15,745     

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

10. Fair Value Measurements

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of September 30, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Assets measured at fair value on a recurring basis as of September 30, 2010 (in thousands):

 

     September 30,
2010
     Fair Value Measurement at Reporting Date Using  

Description

      Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs (Level 3)
 

U.S. Treasury

   $ 650       $ 650       $ —        $ —     

U.S. Agencies

     17,429         17,429         —          —     

Mortgage-backed

     4,835         —           4,835        —     

State and political subdivisions

     4,317         —           4,317        —     

Trading – other

     13,289         13,550         (261     —     
                                  

Trading securities

     40,520         31,629         8,891        —     
                                  

U.S. Treasury

     670,760         670,760         —          —     

U.S. Agencies

     1,584,881         1,584,881         —          —     

Mortgage-backed

     1,660,249         —           1,660,249        —     

State and political subdivisions

     1,139,610         —           1,139,610        —     

Corporates

     3,167         3,167         —          —     
                                  

Available for sale securities

     5,058,667         2,258,808         2,799,859        —     
                                  

Total

   $ 5,099,187       $ 2,290,437       $ 2,808,750      $ —     
                                  

The fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis is required to be disclosed. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and Short-Term Investments The carrying amounts of cash and due from banks, federal funds sold and resell agreements are reasonable estimates of their fair values.

Securities Available for Sale Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit rating and for the same remaining maturities.

Deposit Liabilities The fair value of demand deposits and savings accounts is the amount payable on demand at September 30, 2010 and December 31, 2009. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates that are currently offered for deposits of similar remaining maturities.

Short-Term Debt The carrying amounts of federal funds purchased, repurchase agreements and other short-term debt are reasonable estimates of their fair value because of the short-term nature of their maturities.

Long-Term Debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Other Off-Balance Sheet Instruments The fair value of loan commitments and letters of credit are determined based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. Neither the fees earned during the year on these instruments nor their fair values at September 30, 2010 are significant to the Company’s consolidated financial position.

The estimated fair value of the Company’s financial instruments at September, 30, 2010 and December 31, 2009 are as follows (in millions):

 

     September 30
2010
     December 31
2009
 
      Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

FINANCIAL ASSETS

           

Cash and short-term investments

   $ 1,013.4       $ 1,013.4       $ 1,845.1         1,845.1   

Securities available for sale

     5,058.7         5,058.7         4,885.8         4,885.8   

Securities held to maturity

     59.9         59.9         57.0         57.0   

Federal Reserve Bank and other stock

     22.3         22.3         22.7         22.7   

Trading securities

     40.5         40.5         38.2         38.2   

Loans (exclusive of allowance for loan loss)

     4,594.8         4,679.3         4,268.1         4,395.1   

FINANCIAL LIABILITIES

           

Demand and savings deposits

     7,057.1         7,057.1         6,679.5         6,679.5   

Time deposits

     1,544.7         1,558.8         1,855.0         1,874.7   

Federal funds and repurchase agreements

     1,432.2         1,432.1         1,927.6         1,927.6   

Short-term debt

     27.8         27.9         29.5         29.6   

Long-term debt

     9.0         9.7         25.5         27.8   

OFF-BALANCE SHEET ARRANGEMENTS

           

Commitments to extend credit for loans

        4.2            4.7   

Commercial letters of credit

        0.2            0.2   

Standby letters of credit

     281.6         1.5         308.9         1.6   

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2010 and December 31, 2009. The estimated market values have not been updated since September 30, 2010; therefore current estimates of fair value may differ significantly from the amounts presented above.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)

 

 

11. Acquisition

On July 30, 2010, UMB Advisors, LLC (“UMB Advisors”) and UMB Merchant Banc, LLC (“UMBMB”, together with UMB Advisors, the “Buyers”), a subsidiary of UMB Financial Corporation, completed the purchase of substantially all of the assets of Prairie Capital Management LLC (“Prairie Capital”) and PCM LLC (“PCM”) for cash of $25.9 million. Prairie Capital is in the business of providing investment management services, and PCM is the general partner of various investment funds and associated with Prairie Capital’s business. UMB Advisors purchased substantially all of the assets of Prairie Capital’s business, and UMBMB purchased substantially all of the assets of PCM’s business. This acquisition increased the Company’s assets under management base by $2.2 billion and increased the Company’s servicing assets by $2.6 billion. Goodwill amounted to $32.2 million with the remaining purchase price allocated to cash, furniture, fixtures, prepaid assets, and unearned income. Identifiable intangible assets amounted to $19.4 million. Total goodwill and intangible assets are inclusive of contingent earn-out payments based on revenue targets over the next five years. This earn-out liability was estimated to be $26.0 million at the purchase date.

On September 1, 2010, Scout Investment Advisors, Inc. (Scout), a wholly-owned subsidiary of UMB Financial Corporation, entered into an asset purchase agreement with Reams Asset Management Company, LLC (Reams), MME Investments, LLC, Mark M. Egan, David B. McKinney, Hilltop Capital, LLC, Thomas M. Fink, Stephen T. Vincent, Todd C. Thompson, Deanne B. Olson, and Daniel P. Spurgeon to purchase substantially all of the assets of Reams. Reams is a provider of investment management services to institutional clients and a manager of over $9.8 billion in fixed income assets. Under the purchase agreement, at closing, Scout will pay Reams an initial cash payment of $42.0 million, plus or minus a purchase price adjustment based upon Reams’ accrued revenues, prepaid expenses and accrued expenses, less a certain amount of cash. Reams will also be entitled to receive $1 million worth of unregistered common stock of UMB if at least ninety-five percent of the revenue of Reams is retained by Scout on the determination date as defined in the purchase agreement. Reams may also be entitled to receive annual earn-out payments during the next five years based upon performance measures defined by the purchase agreement for each year. This transaction is scheduled to close on November 30, 2010.

Following the closing of the transaction, Reams’ business will be operated as a division of Scout. Each of Mr. Egan, Mr. McKinney, Mr. Fink, Mr. Thompson, Ms. Olson, Mr. Vincent, and Mr. Spurgeon will continue to serve as officers of such division. Under employment agreements, they will be subject to non-competition, non-solicitation and confidentiality provisions.

 

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Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This review highlights the material changes in the results of operations and changes in financial condition for the three-month and nine-month periods ended September 30, 2010. It should be read in conjunction with the accompanying condensed consolidated financial statements, notes to condensed consolidated financial statements and other financial statistics appearing elsewhere in this report. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

The information included or incorporated by reference in this report contains forward-looking statements of expected future developments within the meaning of and pursuant to the safe harbor provisions established by Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may refer to financial condition, results of operations, plans, objectives, future financial performance and business of the Company, including, without limitation:

 

   

Statements that are not historical in nature; and

 

   

Statements preceded by, followed by or that include the words “believes,” “expects,” “may,” “should,” “could,” “anticipates,” “estimates,” “intends,” or similar words or expressions;

Forward-looking statements are not guarantees of future performance or results. You are cautioned not to put undue reliance on any forward-looking statement which speaks only as of the date it was made. Forward-looking statements reflect management’s expectations and are based on currently available data; however, they involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

   

General economic and political conditions, either nationally, internationally or in the Company’s footprint, may be less favorable than expected;

 

   

Legislative or regulatory changes;

 

   

Changes in the interest rate environment;

 

   

Changes in the securities markets impacting mutual fund performance and flows;

 

   

Changes in operations;

 

   

Changes in accounting rules;

 

   

The ability to successfully and timely integrate acquisitions;

 

   

Competitive pressures among financial services companies may increase significantly;

 

   

Changes in technology may be more difficult or expensive than anticipated;

 

   

Changes in the ability of customers to repay loans;

 

   

Changes in loan demand may adversely affect liquidity needs; and

 

   

Changes in employee costs.

Any forward-looking statements should be read in conjunction with information about risks and uncertainties set forth in this report and in documents incorporated herein by reference. Forward-looking statements speak only as of the date they are made, and the Company does not intend to review or revise any particular forward-looking statement in light of events that occur thereafter or to reflect the occurrence of unanticipated events.

 

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Table of Contents

 

Overview

The Company focuses on the following four core strategies. Management believes these strategies will continue to improve net income and strengthen the balance sheet.

The first strategy is to grow the Company’s fee-based businesses. The emphasis on fee-based operations helps reduce the Company’s exposure to changes in interest rates. During the third quarter of 2010, noninterest income increased $9.6 million, or 11.9 percent, compared to the same period of 2009. The Company continues to emphasize its asset management, bankcard services, health care services, and treasury management solution businesses. In particular, during the third quarter of 2010, the increase in noninterest income is primarily attributable to increased trust and securities processing income. The increase in these fees for the three month period compared to the same period last year was primarily attributable to an increase in fee income from Scout Funds, fund administration and custody services, and revenues from the acquisition of Prairie Capital Management, LLC. Fee income from the Scout Funds increased by $3.2 million, or 36.0 percent, fund administration and custody services fees increased by $1.8 million, or 12.9 percent, and $1.6 million in increased fee revenues due to the acquisition.

The second strategy is a focus on net interest income through loan and deposit growth, which includes a focus on rate, volume and mix. Net interest income increased $2.5 million for the three months ended September 30, 2010, compared to one year ago. Total loans increased $268.6 million, or 6.2 percent, compared to third quarter of 2009. Total deposits increased $711.6 million, or 9.0 percent, compared to third quarter of 2009. , Of the total deposit growth, 25.9 percent came from non-interest-bearing deposits and is a primary driver of the decrease in total interest expense of $4.5 million, or 34.7 percent. Average earning assets increased by $1.1 billion, or 11.8 percent, compared to the third quarter of 2009 due to the increased deposit funding.

The third strategy is a focus on improving operating efficiencies. At September 30, 2010, the Company had 133 branches. Efficient utilization of our distribution network remains a priority. The Company emphasizes increasing its customer base by providing a broad offering of services through our existing network. These efforts have resulted in the total deposits growth previously discussed. The Company’s efficiency ratio for the quarter was 75.7 percent in 2010 and 71.7 percent in 2009. The Company continues to evaluate its cost structure for opportunities to moderate expense growth without sacrificing growth initiatives. The Company also continues to focus on cost savings through technology solutions that improve and automate processes.

The fourth strategy is a focus on capital management. Specifically, the Company continues to invest in organic growth; acquisition opportunities that make sense strategically, financially, operationally, and culturally; and focus on returning capital to shareholders. As an example of the Company putting capital to work, bankcard fees increased by $2.9 million, or 24.7 percent, for the three months ended September 30, 2010, compared to the same periods one year ago. This increase is directly associated with the acquisition of credit card portfolios since third quarter 2009. The Company repurchased 70,799 shares of common stock at an average price of $33.98 per share during the third quarter of 2010. The Company places a significant emphasis on the maintenance of a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. At September 30, 2010, the Company had $1.1 billion in shareholders equity, which resulted in a total risk-based capital ratio of 13.78 percent. This capital ratio is substantially higher than the 10 percent regulatory minimum to be considered well-capitalized.

Earnings Summary

The Company recorded consolidated net income of $22.8 million for the three-month period ended September 30, 2010, compared to $24.0 million for the same period a year earlier. This represents a 5.1 percent decrease over the three-month period ended September 30, 2009. Basic earnings per share for the third quarter of 2010 were $0.57 per share ($0.57 per share fully-diluted) compared to $0.60 per share ($0.59 per share fully-diluted) for the third quarter of 2009. Return on average assets and return on average common shareholders’ equity for the three-month period ended September 30, 2010 were 0.82 and 8.31 percent, respectively, compared to 0.97 and 9.43 percent for the three-month period ended September 30, 2009.

 

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Table of Contents

 

The Company recorded consolidated net income of $72.0 million for the nine-month period ended September 30, 2010, compared to $65.6 million for the same period a year earlier. This represents a 9.7 percent increase over the nine-month period ended September 30, 2009. Basic earnings per share for the nine-month period ended September 30, 2010 were $1.80 per share ($1.78 per share fully-diluted) compared to $1.62 per share ($1.61 per share fully-diluted) for the period in 2009. Return on average assets and return on average common shareholders’ equity for the nine-month period ended September 30, 2010 were 0.88 and 9.09 percent, respectively, compared to 0.87 and 8.78 percent for the same period in 2009.

Net interest income for the three and nine-month periods ended September 30, 2010 increased $2.5 million, or 3.3 percent, and $6.5 million, or 2.9 percent, respectively, compared to the same period in 2009. These increases are primarily due to the reduced level of interest expense on deposits, which outpaced the reduction in interest income during both periods. For the three-month period ended September 30, 2010, average earning assets increased by $1.1 billion, or 11.8 percent, and for the nine-month period ended September 30, 2010, they increased by $839.6, or 9.1 percent, compared to the same periods in 2009. Net interest margin, on a tax-equivalent basis, decreased to 3.23 percent and 3.24 percent for the three and nine-months periods ended September 30, 2010, compared to 3.51 percent and 3.44 percent for the same periods in 2009. These changes are discussed in greater detail below under Net Interest Income.

The provision for loan losses decreased by $0.6 million and increased by $3.5 million for the three and nine-month periods ended September 30, 2010, compared to the same periods in 2009. These changes are a direct result of applying the Company’s methodology for computing the allowance for loan losses. The allowance for loan losses as a percentage of total loans increased by 22 basis points to 1.59 percent as of September 30, 2010, compared to September 30, 2009. For a description of the Company’s methodology for computing the allowance for loan losses, please see the summary discussion of the Allowance for Loan Losses within the Critical Accounting Policies and Estimates subsection of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in the Company’s 2009 Annual Report on Form 10-K.

Noninterest income increased by $9.6 million, or 11.9 percent, for the three-month period ended September 30, 2010 and increased by $38.8 million, or 17.1 percent, for the nine-month period ended September 30, 2010, compared to the same periods one year ago. These increases are discussed in greater detail below under Noninterest Income.

Noninterest expense increased by $15.4 million, or 13.3 percent, for the three-month period ended September 30, 2010, and increased by $33.3 million, or 9.8 percent, for the nine-month period ended September 30, 2010, compared to the same periods in 2009. These increases are discussed in greater detail below under Noninterest Expense.

Net Interest Income

Net interest income is a significant source of the Company’s earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. For the three-month period ended September 30, 2010, net interest income increased $2.5 million, or 3.3 percent, compared to the same period in 2009. For the nine-month period ended September 30, 2010, net interest income increased $6.5 million, or 2.9 percent, compared to the same period in 2009.

Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. The Company continues to experience a repricing of these earning assets and interest-bearing liabilities during the recent interest rate cycle. While the Company continues to see declining rates, it has been able to improve net interest income. As illustrated in this table, net interest spread for the three months ended September 30, 2010 decreased by 19 basis points and net interest margin decreased by 28 basis points compared to the same period in 2009. Net interest spread for the nine months ended September 30, 2010 decreased by 12 basis points and net interest margin decreased by 21 basis points compared to the same period in 2009. These results are due to a favorable volume variance on earning assets coupled with a favorable rate variance on deposits, which has more than offset the unfavorable rate variance on earning assets. The combined impact of these variances has led to an increase in the Company’s net interest income.

 

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Table of Contents

 

The favorable rate variance on deposits is bolstered by the contribution from free funds. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and rates have resulted in an increase in net interest income.

Table 1

AVERAGE BALANCES/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)

The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax equivalent basis adjustment would have been 3.07 percent for the three-month period ended September 30, 2010 and 3.89 percent for the same period in 2009.

 

     Three Months Ended September 30,  
     2010     2009  
     Average
Balance
    Average
Yield/Rate
    Average
Balance
    Average
Yield/Rate
 

Assets

        

Loans, net of unearned interest

   $ 4,569,900        4.92   $ 4,354,961        4.97

Securities:

        

Taxable

     4,044,955        2.16        3,175,441        3.18   

Tax-exempt

     1,089,222        4.14        984,534        4.73   
                                

Total securities

     5,134,177        2.58        4,159,975        3.55   

Federal funds and resell agreements

     23,462        0.49        40,057        0.48   

Interest-bearing due from banks

     365,481        0.81        473,868        0.99   

Trading

     41,197        1.79        37,250        2.47   
                                

Total earning assets

     10,134,217        3.56        9,066,111        4.08   

Allowance for loan losses

     (70,385       (57,957  

Other assets

     938,083          839,486     
                    

Total assets

   $ 11,001,915        $ 9,847,640     
                    

Liabilities and Shareholders’ Equity

        

Interest-bearing deposits

   $ 5,574,615        0.56   $ 5,171,736        0.94

Federal funds and repurchase agreements

     1,459,219        0.14        1,184,647        0.15   

Borrowed funds

     36,635        0.90        50,285        2.85   
                                

Total interest-bearing liabilities

     7,070,469        0.48        6,406,668        0.81   

Noninterest-bearing demand deposits

     2,711,061          2,297,832     

Other liabilities

     133,474          133,028     

Shareholders’ equity

     1,086,911          1,010,112     
                    

Total liabilities and shareholders’ equity

   $ 11,001,915        $ 9,847,640     
                    

Net interest spread

       3.08       3.27

Net interest margin

       3.23          3.51   

 

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Table of Contents

 

     Nine Months Ended September 30,  
     2010     2009  
      Average
Balance
    Average
Yield/Rate
    Average
Balance
    Average
Yield/Rate
 

Assets

        

Loans, net of unearned interest

   $ 4,451,687        4.99   $ 4,400,316        4.89

Securities:

        

Taxable

     3,897,936        2.34        3,361,316        3.20   

Tax-exempt

     1,016,550        4.42        911,449        4.96   
                                

Total securities

     4,914,486        2.77        4,272,765        3.57   

Federal funds and resell agreements

     51,568        0.36        57,322        0.53   

Interest-bearing due from banks

     619,288        0.67        473,040        0.84   

Trading

     39,281        1.83        33,239        2.56   
                                

Total earning assets

     10,076,310        3.61        9,236,682        4.04   

Allowance for loan losses

     (67,809       (55,651  

Other assets

     946,802          849,803     
                    

Total assets

   $ 10,955,303        $ 10,030,834     
                    

Liabilities and Shareholders’ Equity

        

Interest-bearing deposits

   $ 5,583,440        0.62   $ 5,172,665        1.00

Federal funds and repurchase agreements

     1,398,633        0.14        1,364,476        0.16   

Borrowed funds

     43,463        1.36        52,502        2.90   
                                

Total interest-bearing liabilities

     7,025,536        0.53        6,589,643        0.84   

Noninterest-bearing demand deposits

     2,743,050          2,333,091     

Other liabilities

     128,129          108,397     

Shareholders’ equity

     1,058,588          999,703     
                    

Total liabilities and shareholders’ equity

   $ 10,955,303        $ 10,030,834     
                    

Net interest spread

       3.08       3.20

Net interest margin

       3.24          3.44   

Table 2 presents the dollar amount of change in net interest income and margin due to volume and rate. Table 2 also reflects the effect that interest-free funds have on net interest margin. Although interest-free funds (total earning assets less interest-bearing liabilities) increased $404.3 million for the three-month period ended September 30, 2010 compared to the same period in 2009 and increased $403.7 million for the nine-month period ended September 30, 2010 compared to the same period in 2009, the benefit from interest free funds declined by 9 basis points from the three months ended September 30, 2009, and declined by 8 basis points from the nine months ended September 30, 2009, due to decreases in interest rates.

 

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Table 2

ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in thousands)

ANALYSIS OF CHANGES IN NET INTEREST INCOME

 

     Three Months Ended
September 30, 2010 vs. 2009
    Nine Months Ended
September 30, 2010 vs. 2009
 
     Volume     Rate     Total     Volume     Rate     Total  

Change in interest earned on:

            

Loans

   $ 2,680      $ (577   $ 2,103      $ 1,935      $ 3,265      $ 5,200   

Securities:

            

Taxable

     4,735        (8,164     (3,429     9,403        (21,497     (12,094

Tax-exempt

     1,157        (1,381     (224     3,535        (3,602     (67

Federal funds sold and resell agreements

     (21     2        (19     (15     (77     (92

Interest-bearing due from banks

     (222     (210     (432     732        (598     134   

Trading

     21        (55     (34     39        (109     (70
                                                

Interest income

     8,350        (10,385     (2,035     15,629        (22,618     (6,989

Change in interest incurred on:

            

Interest-bearing deposits

     571        (4,894     (4,323     1,912        (14,583     (12,671

Federal funds purchased and repurchase agreements

     99        (20     79        36        (206     (170

Borrowed funds

     (31     (247     (278     (92     (605     (697
                                                

Interest expense

     639        (5,161     (4,522     1,856        (15,394     (13,538
                                                

Net interest income

   $ 7,711      $ (5,224   $ 2,487      $ 13,773      $ (7,224   $ 6,549   
                                                

ANALYSIS OF NET INTEREST MARGIN

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     Change     2010     2009     Change  

Average earning assets

   $ 10,134,217      $ 9,066,111      $ 1,068,106      $ 10,076,310      $ 9,236,682      $ 839,628   

Average interest-bearing liabilities

     7,070,469        6,406,668        663,801        7,025,536        6,589,643        435,893   
                                                

Average interest free funds

   $ 3,063,748      $ 2,659,443      $ 404,305      $ 3,050,774      $ 2,647,039      $ 403,735   
                                                

Free funds ratio (free funds to earning assets)

     30.23     29.33     0.90     30.28     28.66     1.62

Tax-equivalent yield on earning assets

     3.56        4.08        (0.52 )%      3.61     4.04     (0.43 )% 

Cost of interest-bearing liabilities

     0.48        0.81        (0.33     0.53        0.84        (0.31
                                                

Net interest spread

     3.08     3.27     (0.19 )%      3.08     3.20     (0.12 )% 

Benefit of interest-free funds

     0.15        0.24        (0.09     0.16        0.24        (0.08
                                                

Net interest margin

     3.23     3.51     (0.28 )%      3.24     3.44     (0.20 )% 
                                                

Provision and Allowance for Loan Losses

The allowance for loan losses (ALL) represents management’s judgment of the losses inherent in the Company’s loan portfolio as of the balance sheet date. An analysis is performed quarterly to determine the appropriate balance of the ALL. This analysis considers items such as historical loss trends, a review of individual loans, migration analysis, current economic conditions, loan growth and characteristics, industry or segment concentration and other factors. This analysis is performed separately for each bank as regulatory agencies require

 

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that the adequacy of the ALL be maintained on a bank-by-bank basis. After the balance sheet analysis is performed for the ALL, the provision for loan losses is computed as the amount required to adjust the ALL to the appropriate level.

Based on the factors above, management of the Company expensed $7.7 million and $24.1 million related to the provision for loan losses for the three and nine-month periods ended September 30, 2010, compared to $8.3 million and $20.6 million for the same periods in 2009. As illustrated in Table 3 below, the ALL increased to 1.59 percent of total loans as of September 30, 2010, compared to 1.36 percent of total loans as of the same period in 2009.

Table 3 presents a summary of the Company’s ALL for the nine months ended September 30, 2010 and 2009 and for the year ended December 31, 2009. Net charge-offs were $15.5 million for the first nine months of 2010, compared to $14.1 million for the same period in 2009. See “Credit Risk Management” under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.

Table 3

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (unaudited, dollars in thousands)

 

    

Nine Months Ended

September 30,

   

Year Ended

December 31,

 
    
     2010     2009     2009  

Allowance-January 1

   $ 64,139      $ 52,297      $ 52,297   

Provision for loan losses

     24,110        20,600        32,100   

Allowance of banks and loans acquired

     —          —          —     
                        

Charge-offs:

      

Commercial

     (4,519     (3,716     (5,532

Consumer:

      

Bankcard

     (11,353     (9,930     (13,625

Other

     (2,525     (3,801     (4,911

Real estate

     (27     (458     (881
                        

Total charge-offs

     (18,424     (17,905     (24,949
                        

Recoveries:

      

Commercial

     484        1,264        1,419   

Consumer:

      

Bankcard

     906        1,021        1,334   

Other

     1,503        1,534        1,936   

Real estate

     1        1        2   
                        

Total recoveries

     2,894        3,820        4,691   
                        

Net charge-offs

     (15,530     (14,085     (20,258
                        

Allowance-end of period

     72,719        58,812        64,139   
                        

Average loans, net of unearned interest

   $ 4,439,245      $ 4,380,906      $ 4,356,187   

Loans at end of period, net of unearned interest

     4,583,562        4,314,977        4,314,705   

Allowance to loans at end of period

     1.59     1.36     1.49

Allowance as a multiple of net charge-offs

     3.50     3.12     3.17

Net charge-offs to:

      

Provision for loan losses

     64.41     68.37     63.11

Average loans

     0.47        0.43        0.47   

 

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Noninterest Income

A key objective of the Company is the growth of noninterest income to enhance profitability through a diverse set of revenues. Fee-based services are typically non-credit related and not generally affected by fluctuations in interest rates.

The Company’s fee-based services provide the opportunity to offer multiple products and services, which management believes will more closely align the customer with the Company. The Company is currently emphasizing fee-based services including trust and securities processing, bankcard, brokerage, health care services, and treasury management. Management believes it can offer these products and services both efficiently and profitably, as most share common platforms and support structures. Table 4 below summarizes the components of noninterest income and the respective year-over-year comparison for each category.

Table 4

SUMMARY OF NONINTEREST INCOME (dollars in thousands)

 

     Three Months Ended September 30,  
            Dollar
Change
    Percent
Change
 
     2010      2009      10-09     10-09  

Trust and securities processing

   $ 39,843       $ 32,630       $ 7,213        22.11

Trading and investment banking

     7,897         6,787         1,110        16.35   

Service charges on deposits

     19,431         20,598         (1,167     (5.67

Insurance fees and commissions

     1,554         1,255         299        23.82   

Brokerage fees

     1,746         1,629         117        7.18   

Bankcard fees

     14,555         11,671         2,884        24.71   

Gains on sale of securities available for sale, net

     752         3,306         (2,554     (77.25

Other

     4,306         2,642         1,664        62.98   
                                  

Total noninterest income

   $ 90,084       $ 80,518       $ 9,566        11.88
                                  
     Nine Months Ended September 30,  
            Dollar
Change
    Percent
Change
 
     2010      2009      10-09     10-09  

Trust and securities processing

   $ 114,029       $ 86,164       $ 27,865        32.34

Trading and investment banking

     20,454         20,625         (171     (0.83

Service charges on deposits

     60,114         62,527         (2,413     (3.86

Insurance fees and commissions

     4,540         3,710         830        22.37   

Brokerage fees

     4,679         5,493         (814     (14.82

Bankcard fees

     40,554         33,760         6,794        20.12   

Gains on sale of securities available for sale, net

     7,270         5,198         2,072        39.86   

Other

     13,950         9,273         4,677        50.44   
                                  

Total noninterest income

   $ 265,590       $ 226,750       $ 38,840        17.13
                                  

Fee-based, or noninterest income (summarized in Table 4), increased by $9.6 million, or 11.9 percent, during the three months ended September 30, 2010, and increased by $38.8 million, or 17.1 percent, during the nine months ended September 30, 2010, compared to the same periods in 2009.

Trust and securities processing consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and money management services, and servicing of mutual fund assets. The increase in these fees for the three and nine-month periods compared to the same periods last year was primarily attributable to an increase in fee income from Scout Funds, fund administration and custody services, and fee

 

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revenue from the newly acquired Prairie Capital Management, LLC. Fee income from the Scout Funds for the three and nine-month periods ended September 30, 2010, increased by $3.2 million, or 36.0 percent, and by $11.5 million, or 49.6 percent, respectively. Fund administration and custody services fees for the three and nine-month periods ended September 30, 2010, increased by $1.8 million, or 12.9 percent, and $12.7 million, or 37.5 percent, respectively. Trust and securities processing fees are asset-based. As such, they are highly correlated to the change in market value of the assets. Thus, the related income for the remainder of the year will be affected by changes in the securities markets. Management continues to emphasize sales of services to both new and existing clients as well as increasing and improving the distribution channels, which lead to increased inflows into the Scout Funds.

Service charges on deposits decreased by $1.2 million, or 5.7 percent, and by $2.4 million, or 3.9 percent for the three and nine months ended September 30, 2010, compared to the same periods one year ago. This decrease is primarily due to new overdraft regulations enacted on July 21, 2010.

Bankcard fees increased by $2.9 million, or 24.7 percent, and by $6.8 million, or 20.1 percent for the three and nine months ended September 30, 2010, compared to the same periods one year ago. This increase is directly associated with the acquisition of credit card portfolios during the periods.

During the three months ended September 30, 2010, $0.8 million in pre-tax gains were recognized on the sales of securities available for sale, compared to $3.3 million during the same period in 2009. For the first nine months of 2010, $7.5 million in pre-tax gains were recognized on the sales of securities available for sale, compared to $5.2 million during the same period in 2009. These sales are part of an objective to monitor and control the Company’s interest rate sensitivity in an anticipated rising interest rate environment.

Noninterest Expense

The components of noninterest expense are shown below on Table 5.

Table 5

SUMMARY OF NONINTEREST EXPENSE (in thousands)

 

     Three Months Ended September 30,  
            Dollar
Change
    Percent
Change
 
     2010      2009      10-09     10-09  

Salaries and employee benefits

   $ 69,044       $ 60,193       $ 8,851        14.70

Occupancy, net

     9,162         8,982         180        2.00   

Equipment

     11,122         11,187         (65     (0.58

Supplies and services

     4,822         4,787         35        0.73   

Marketing and business development

     4,426         4,036         390        9.66   

Processing fees

     11,570         9,659         1,911        19.78   

Legal and consulting

     4,108         2,763         1,345        48.68   

Bankcard

     4,292         3,615         677        18.73   

Amortization of other intangibles

     3,150         1,847         1,303        70.55   

Regulatory fees

     3,219         3,036         183        6.03   

Other

     5,720         5,152         568        11.02   
                                  

Total noninterest expense

   $ 130,635       $ 115,257       $ 15,378        13.34
                                  

 

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     Nine Months Ended September 30,  
            Dollar
Change
    Percent
Change
 
     2010      2009      10-09     10-09  

Salaries and employee benefits

   $ 194,849       $ 177,786       $ 17,063        9.60

Occupancy, net

     27,007         25,698         1,309        5.09   

Equipment

     33,205         36,181         (2,976     (8.23

Supplies and services

     14,209         15,734         (1,525     (9.69

Marketing and business development

     12,561         11,397         1,164        10.21   

Processing fees

     33,812         24,803         9,009        36.32   

Legal and consulting

     8,500         6,954         1,546        22.23   

Bankcard

     11,842         10,498         1,344        12.80   

Amortization of other intangibles

     7,684         4,318         3,366        77.95   

Regulatory fees

     9,974         12,672         (2,698     (21.29

Other

     20,470         14,738         5,732        38.89   
                                  

Total noninterest expense

   $ 374,113       $ 340,779       $ 33,334        9.78
                                  

Noninterest expense increased by $15.4 million, or 13.3 percent, for the three months ended September 30, 2010, and by $33.3 million, or 9.8 percent, for the nine months ended September 30, 2010, compared to the same period in 2009. Table 5 above summarizes the components of noninterest expense and the respective year-over-year comparison for each category.

Salaries and employee benefits increased by $8.9 million, or 14.7 percent, for the three months ended September 30, 2010, and by $17.1 million, or 9.6 percent, for the nine months ended September 30, 2010, compared to the same period in 2009. These increases are primarily due to higher base salary, commission, and health insurance costs. Within each of these categories is the direct impact from the acquisitions during the periods. Salaries increased by $3.5 million, or 7.0 percent, and $5.9 million, or 4.8 percent, for the three and nine months ended September 30, 2010, compared to the same periods in 2009. Commissions and bonuses increased by $5.1 million, or 31.3 percent, and $8.0 million, or 35.6 percent, for the three and nine months ended September 30, 2010, compared to the same periods in 2009. Employee benefits costs increased by $0.4 million, or 4.0 percent, and $2.1 million, or 7.1 percent, for the three and nine months ended September 30, 2010, compared to the same periods in 2009.

Processing fees increased $1.9 million, or 19.8 percent, for the three months ended September 30, 2010, and by $9.0 million, or 36.3 percent, for the nine months ended September 30, 2010, compared to the same period in 2009. This increase, which is correlated to the increase in trust and securities processing income noted above, is due to increased third party custodian fees related to international transactions from mutual fund clients and fees paid by the advisor to third-party distributors of the Scout Funds.

Income Tax Expense

The effective tax rate is 27.4 percent for the nine months ended September 30, 2010, compared to 27.6 percent for the same period in 2009.

 

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Strategic Lines of Business

Table 6

NET INCOME (LOSS) BEFORE TAXES BY SEGMENT (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Segment

           

Commercial Financial Services

   $ 15,912       $ 15,755       $ 45,616       $ 46,370   

Institutional Financial Services

     11,634         12,667         38,112         41,703   

Personal Financial Services

     2,060         155         13,059         (780

Treasury and Other Adjustments

     526         4,280         2,406         3,355   
                                   

Total Consolidated Company

   $ 30,132       $ 32,857       $ 99,193       $ 90,648   
                                   

Commercial Financial Services’ net income before taxes decreased $0.8 million, or 1.6 percent, to $45.6 million for the nine months ended September 30, 2010. The decrease in net income was driven primarily by an increase in noninterest expense of $4.9 million, or 6.0 percent, offset by a decrease in provision for loan loss of $1.9 million, or 18.7 percent, an increase in net interest income of $0.9 million, or 0.8 percent, and an increase in noninterest income of $1.4 million, or 5.5 percent. Noninterest expense increased due to higher allocated overhead costs compared to 2009. Total earning asset balances are up over the prior year by $40.0 million, or 1.2 percent; whereas, deposits and repurchase agreements increased by $206.0 million, 6.2 percent. Volume increases on both sides of the balance sheet are driving the increase in net interest margin. Noninterest income increased due to higher loan fees.

Institutional Financial Services’ net income before taxes decreased $3.6 million to $38.1 million from the same period in 2009. Noninterest income increased $33.2 million, offset by a $27.7 million increase in noninterest expense and a $4.3 million decrease in net interest income. Noninterest income increased due to a $11.5 million increase in advisory fees associated with the Scout Funds and a $12.7 million increase in fund administration and custody services income. Scout Fund fee income increased due to inflows of $1.1 billion for the nine months ended September 30, 2010 and overall market appreciation over last year. Fee income from the acquisition of J.D. Clark & Co., Inc. and market appreciation were the drivers of the increase in fund administration and custody services income compared to 2009. Credit card income increased $4.9 million due to increased processing fees. Credit card balances increased approximately $121.0 million compared to 2009 primarily from the acquisition of 5 credit card portfolios totaling approximately $90.0 million over the past year. Noninterest expense increased $3.4 million from third party custodial fees related to international transactions from mutual fund clients and increased $3.7 million in third party fees paid by the advisor to distributors of the Scout Funds. The other driver was an increase in salaries and benefits of $14.0 million due to increased commission expense related to the increased revenue in this segment as well as the addition of base salary expenses from the acquisition of J.D. Clark & Co., Inc. Net interest income decreased due to decreased funds transfer pricing on deposits in this segment.

Personal Financial Services’ net income before taxes increased by $13.8 million to $13.1 million compared to 2009. Several drivers contributed to this increase. Earning asset balances have decreased, but the rate of the decrease has slowed in 2010 as the indirect automobile portfolio runoff is slowing. This is offset by the growth in the home equity loan portfolio. Net interest income increased $10.0 million, or 14.6 percent, over 2009 due to decreased funds transfer pricing costs on assets and an increased funds transfer pricing on deposits in this segment. The deposit balances have also increased in this segment compared to 2009. Noninterest income increased $1.9 million, or 2.7 percent, from 2009. This increase was due to an increase in trust fee income related to the acquisition of Prairie Capital Management, LLC. This increase was offset by a reduction in deposit service charges as a result of changes in consumer behavior as a result of the new overdraft legislation that became effective during the quarter. Noninterest expense decreased $2.7 million, or 2.0 percent, over 2009. The decrease was primarily due to a decreased salaries and benefits expenses and decreased allocated overhead expenses.

The net income before tax for the Treasury and Other Adjustments category was $2.4 million for the first nine months of 2010, compared to net income before tax of $3.4 million for the same period in 2009.

 

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Balance Sheet Analysis

Total assets of the Company as of September 30, 2010 decreased $323.3 million compared to December 31, 2009 and increased $1.1 million, or 10.8 percent, compared to September 30, 2009. The increase in total assets from September 2009 to September 2010 is a result of increased investment securities balances including trading securities of $678.8 million, or 15.1 percent. This asset balance increase is directly related to a corresponding increase in deposit balances between the same periods of $711.6 million, or 9.0 percent, and an increase in fed funds purchased and repurchase agreements of $285.5 million, or 24.9 percent. The decrease in total assets from December to September is primarily a result of the cyclical trend due to the pledging of investment securities and collateral required related to seasonal public fund repurchase agreements and deposits.

Total deposits increased slightly and federal funds purchased and securities sold under agreement to repurchase declined at September 30, 2010 compared to December 31, 2009. Deposits increased by $67.3 million, or 0.8 percent, from December to September, and federal funds purchased and securities sold under agreement to repurchase decreased by $495.4 million, or 25.7 percent, from December to September. This decline in securities sold under agreement to repurchase is primarily driven by the run-off of seasonal public fund tax deposits, as such tax deposits are generally higher around the end of the calendar year.

Table 7

SELECTED BALANCE SHEET INFORMATION (unaudited, dollars in thousands)

 

     September 30,      December  31,
2009
 
     2010      2009     

Total assets

   $ 11,340,041       $ 10,235,496       $ 11,663,355   

Loans, net of unearned interest

     4,583,562         4,314,977         4,314,705   

Total investment securities

     5,181,441         4,502,596         5,003,720   

Interest-bearing due from banks

     658,347         539,357         1,057,195   

Total earning assets

     10,384,286         9,421,482         10,658,769   

Total deposits

     8,601,815         7,890,189         8,534,488   

Total borrowed funds

     1,469,066         1,199,370         1,982,579   

Loans

Loans represent the Company’s largest source of interest income. In addition to growing the commercial loan portfolio, management believes its middle market commercial business and its consumer business, including home equity and credit card loan products, are the market niches that represent its best opportunity to cross-sell fee-related services.

Total loan balances have increased $268.9 million, or 6.2 percent, compared to December 31, 2009 and increased $268.6 million, or 6.2 percent, at September 30, 2010 compared to September 30, 2009. The increase from December 31, 2009 is primarily a result of a 3.8 percent increase in commercial loans and a 11.4 percent increase in real estate loans. The increase at September 30, 2010 compared to September 30, 2009 was primarily related to a $242.3 million increase in real estate loans and a $38.1 million decrease in consumer loans. The increase in real estate loans is driven by home equity loans and commercial real estate loans.

Nonaccrual, past due and restructured loans are discussed under “Credit Risk Management” within “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report.

Securities

The Company’s securities portfolio provides liquidity as a result of the composition and average life of the underlying securities. This liquidity can be used to fund loan growth or to offset the outflow of traditional funding sources. In addition to providing a potential source of liquidity, the securities portfolio can be used as a tool to manage interest rate sensitivity. The Company’s goal in the management of its securities portfolio is to maximize return within the Company’s parameters of liquidity goals, interest rate risk and credit risk. The Company maintains strong liquidity levels while investing in only high-grade securities. The securities portfolio generates the Company’s second largest component of interest income.

 

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Investment securities totaled $5.2 billion at September 30, 2010, compared to $4.5 billion at September 30, 2009, and $5.0 billion at December 31, 2009. Collateral pledging requirements for public funds, loan demand, and deposit funding are the primary factors impacting changes in the level of security holdings. Investment securities comprised 49.9 percent, 46.9 percent, and 47.8 percent, respectively, of the earning assets as of September 30, 2010, December 31, 2009, and September 30, 2009. There were $3.6 billion of these securities pledged to secure U.S. Government deposits, other public deposits, securities sold under repurchase agreements, and certain trust deposits as required by law at September 30, 2010.

Investment securities had an average tax-equivalent yield of 2.77 percent for the first nine months of 2010 compared to 3.57 percent for the same period in 2009, or a decrease of 80 basis points. The average life of the securities portfolio was 26.7 months at September 30, 2010 compared to 22.9 months at December 31, 2009 and 24.2 months at September 30, 2009. The increase in average life from September 30, 2009 was related to a modest lengthening of the portfolio due to a lower percentage of short term investments held in the portfolio compared to the same period last year.

Deposits and Borrowed Funds

Deposits increased $67.3 million, or 0.8 percent, from December 31, 2009 to September 30, 2010 and increased $711.6 million from September 30, 2009. Noninterest-bearing deposits were flat and interest-bearing deposits increased $63.8 million from December 31, 2009. Noninterest-bearing deposits increased $184.1 million and interest-bearing deposits increased $527.5 million from September 30, 2009. The increase in deposits from September 30, 2009 came primarily from the public funds, mutual fund processing and treasury management businesses.

Deposits represent the Company’s primary funding source for its asset base. In addition to the core deposits garnered by the Company’s retail branch structure, the Company continues to focus on its cash management services, as well as its trust and mutual fund services in order to attract and retain additional core deposits. Management believes a strong core deposit composition is one of the Company’s key competencies given its competitive product mix.

Borrowed funds decreased $513.5 million from December 31, 2009. Borrowed funds are typically higher at year end due to repurchase agreements related to public funds. Borrowings, other than repurchase agreements, are a function of the source and use of funds and will fluctuate to cover short term gaps in funding.

Federal funds purchased and securities sold under agreement to repurchase totaled $1.4 billion at September 30, 2010, compared to $1.9 billion at December 31, 2009. Repurchase agreements are transactions involving the exchange of investment funds by the customer for securities by the Company under an agreement to repurchase the same or similar issues at an agreed-upon price and date.

Capital and Liquidity

The Company places a significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. The Company manages capital for each subsidiary based upon the subsidiary’s respective risks and growth opportunities as well as regulatory requirements.

Total shareholders’ equity was $1.1 billion at September 30, 2010, a $74.6 million increase compared to December 31, 2009. The Company’s Board of Directors authorized, at its April 27, 2010, April 21, 2009, and April 22, 2008 meetings, the repurchase of up to two million shares of the Company’s common stock during the twelve months following the meetings. During the nine months ended September 30, 2010 and 2009, the Company acquired 201,518 shares and 689,743 shares, respectively, of its common stock under these plans. The Company has not made any purchases other than through these plans.

 

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On October 26, 2010, the Board of Directors declared a dividend of $0.195 per share. The dividend will be paid on December 30, 2010 to shareholders of record on December 10, 2010.

Risk-based capital guidelines established by regulatory agencies set minimum capital standards based on the level of risk associated with a financial institution’s assets. A financial institution’s total capital is required to equal at least 8 percent of risk-weighted assets and must be at least 10 percent of risk-weighted assets to be considered well-capitalized. At least half of the 8 percent minimum must consist of Tier 1 core capital, and the remainder may be Tier 2 supplementary capital. The risk-based capital guidelines indicate the specific risk weightings by type of asset. Certain off-balance-sheet items (such as standby letters of credit and binding loan commitments) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings. Due to the Company’s high level of core capital and substantial portion of earning assets invested in government securities, the Tier 1 capital ratio of 12.61 percent and total capital ratio of 13.78 percent substantially exceed the regulatory minimums.

For further discussion of capital and liquidity, see “Liquidity Risk” under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report.

Table 8

The Company’s capital position is summarized in the table below and exceeds regulatory requirements:

 

      Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

RATIOS

   2010     2009     2010     2009  

Return on average assets

     0.82     0.97     0.88     0.87

Return on average equity

     8.31        9.43        9.09        8.78   

Average equity to assets

     9.88        10.26        9.66        9.97   

Tier 1 risk-based capital ratio

     12.61        13.50        12.61        13.50   

Total risk-based capital ratio

     13.78        14.51